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A theoretical analysis of alternative approaches to financial regulation

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  • Francesco M. Paris

Abstract

This paper studies alternative regulatory approaches within the framework of intermediaries’ capital requirements, one of the cornerstones of modern financial regulation. The basic assumptions are that the intermediary’s capital is valued as a down‐and‐out call option written on its own assets and that the optimal capital requirement is the one minimizing the total expected social costs. The analysis discusses the total expected costs’ function within three alternative regulatory contexts and allows for a comparison of alternative approaches formalized by a set of five fundamental propositions explaining the impact of the regulatory choice on critical aspects such as the intermediary’s capital size and riskiness, his/her assets’ choice, the competition among either different intermediaries or different functions and, last but not least, the intermediary’s operational structure.

Suggested Citation

  • Francesco M. Paris, 2000. "A theoretical analysis of alternative approaches to financial regulation," European Financial Management, European Financial Management Association, vol. 6(1), pages 19-40, March.
    • Handle: RePEc:bla:eufman:v:6:y:2000:i:1:p:19-40
    DOI: 10.1111/1468-036X.00109
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    Cited by:

    1. Matthias Bank & Jochen Lawrenz, 2013. "Deposit Finance as a Commitment Device and the Optimal Debt Structure of Commercial Banks," European Financial Management, European Financial Management Association, vol. 19(1), pages 14-44, January.
    2. Douglas da Rosa München & Herbert Kimura, 2020. "Regulatory Banking Leverage: what do you know?," Working Papers Series 540, Central Bank of Brazil, Research Department.

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